Concept explainers
To identify: Nominal dollar amount of last withdrawal.
Real Cash Flows:
Real cash flow is the cash flow which is modified due to increase or decrease in money value so as to present and evaluate any changes that arise in the value of money over a period of time.
Explanation of Solution
Calculation of monthly withdrawal:
Given,
Amount invested per month in stock accounts is $900.
Amount invested per month in bond account is $300.
Annual return on stock is 12%.
Annual return on bond is 7%.
Effective rate of account where money is combined is 8%.
Inflation rate is 4%.
Formula to calculate monthly withdrawal:
Where,
- r is interest rate.
- t is number of time period.
Substitute $1,369,505.19 for
Formula to calculate total
Substitute $1,198,233 for future value (stock account) and $171,272.19 for future value (bond account),
Given below is the calculation of last withdrawal in nominal terms:
Formula to calculate last withdrawal:
Substitute $7063.45 for PV, 0.04 for r and
Working Note:
Monthly Withdrawal:
Calculation of Effective Annual Rate (EAR):
Calculation of Annual percentage rate (APR):
Calculation of monthly interest rate:
Total Future Value:
Calculation of future value of the stock account:
Calculation of future value of the bond account:
Stock Account:
Calculation of Effective Annual Rate (EAR):
Calculation of Annual percentage rate (APR):
Calculation of monthly interest rate:
Bond Account:
Calculation of Effective Annual Rate (EAR):
Calculation of Annual percentage rate (APR):
Calculation of monthly interest rate:
Hence, monthly withdrawal is computed to be $7,063.45.
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Chapter 8 Solutions
EBK CORPORATE FINANCE
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